Gearing up for the Presidential debate
Summary: US equities have continued last week's rebound with the relief rally extending overnight and the S&P 500 gaining the most in two weeks as the index pushed back above the 50DMA. This as the hopes of a stimulus deal crept higher with Pelosi and Mnuchin agreeing to continue talks. However, with month end and quarter end flows adding to the noise of what is already a poisonous, hyper-partisan, political environment as focus shifts to the first Presidential debate, we are reminded one day does not a trend make.
The election risks remain front and centre, uncertain to say the least, whilst the stalling global recovery and rising COVID-19 cases in Europe test the resolve of any bounce, reminding us that the noise and volatility that accompanies this year’s election cycle could keep risk assets in limbo until there is clarity on the policy path. Given the high probability of a contested outcome, this limbo could prevail beyond November 3, making it increasing difficult to pull signal from noise almost through to year-end. Taking precedent from the 2000 US Presidential election, which was unresolved until early December when the Supreme Court ordered a stop to the Florida recount following a month long legal dispute. This year’s election could come with an even greater legal challenge should the results be a close call. In 2000, the S&P 500 dropped 9% before George W Bush emerged as the victor in early December. We expect a pick-up in realised volatility direction agnostic across FX, commodities and equities, both into and throughout this period of heightened noise and uncertainty.
Over the weekend, media outlets reported that Trump intends to nominate Amy Coney Barrett to fill the Supreme Court seat left open by the death of RBG. Barrett would be the third justice on the court to have worked for Republicans on the Bush v. Gore case that handed the GOP the presidency in 2000. The President, rushing the nomination through in anticipation of the legal challenges that will erupt should he refuse to concede. Conditions are ripe for a constitutional crisis of sorts and risk assets will struggle to price the eventual policy path under what could be an extended period of uncertainty.
Focus this week is square on the first Biden-Trump US Presidential debate. The polling odds remain largely in favour of a Biden victory and thus the debate offering Trump a chance to make up lost ground and serving as a test on whether Biden’s momentum can be maintained through to November.
Joe Biden holds an 8-point lead over President Donald Trump, 49% to 41%, according to a recent New York Times/Siena College poll, with Biden holding an impressively wide lead amongst women voters. Biden leads among women by 53% to 37%. However, much can happen before 3 November if polls tighten. In 2016, Hillary Clinton had a 6.3ppt lead on 27 August but by November, that lead had shrunk to just 1.6ppt, within the statistical margin of error.
The 2018 mid-term elections had highest turnout of any mid-term election held since the 1914 elections. Participation was especially high among young people who voted overwhelmingly in support of Democratic House candidates. Over 1 million Americans have already voted vs. approximately 10,000 at this time in 2016, if the polls are right and the trend from the mid-terms has been continued, this should work in favour of the Democrats. Although as was the case in 2016 Trump did not win the popular vote, but instead went after the middle of the country as an agent of disruption, swinging the Electoral College vote.
Any shifts in battleground states have the capacity to swing Electoral College projections, where the system structurally favours Republicans; hence, the debates will be closely watched. Will Biden be able to hold up Trump’s bullying tactics and will there be any displays of cognitive decline, a criticism often touted by Trump supporters.
Given Biden’s already strong lead in polls, a strong show at the debate could raise the expectations of a Democratic clean sweep. One way to lower the odds of a contested outcome (that brings noise and volatility) is via a large margin of victory that cannot be undermined. Although undoubtedly under the clean sweep scenario there is the negative implications for risk assets to be considered, stemming from a democratic legislative agenda including higher corporate taxes and increased capital gains taxes. Alongside the prospect of a pickup in yields with the expectations of a large fiscal stimulus package in 2021 if Democrats control both the house and the senate.
For more please see John Hardy’s US Election Primer: The Final Sprint to November 3rd
We sort through important dates in this final sprint phase of the absurdly long US presidential election cycle. Historically, we have seen significant shifts in the polling in the final weeks leading up to the election. As well, we consider factors that can change the odds between now and Election Day on November 3rd.
And Saxo’s US Election Cheat Sheet Which cuts into the three potential pathways into the elections, probabilities around them, as well as short & long-term positions across equities, bonds, commodities & currencies.